Losses reported in Box 2 of your K-1 are from passive activities (generally rentals) which can only be utilized to offset passive income unless you are a real estate professional who materially participated in the activity.
Note that the same would be the case with respect to an S corporation (K-1 Form 1120-S).
Your loss will, however, be carried over to the following tax year (and future tax years, if necessary) to be used to offset any passive income and cumulative losses will be entirely released upon a sale to an unrelated third party.
active participation is not the same as material participation. with active participation, PAL's are allowed up to $25,000 but only if modified AGI is less than $150,000, for MAGI between $100,000 and $150,000 the $25,000 is reduced by $1 for each $2 MAGI is over $100,000
For the material participation tests listed
below, participation generally includes
any work done in connection with an
activity if you owned an interest in the
activity at the time you did the work. The
capacity in which you did the work
doesn’t matter. However, work isn’t
• It isn’t work that an owner would
customarily do in the same type of
• One of your main reasons for doing
the work was to avoid the disallowance
of losses or credits from the activity
under the passive activity rules.
Proof of participation. You may prove
your participation in an activity by any
reasonable means. You don’t have to
maintain contemporaneous daily time
reports, logs, or similar documents if
you can establish your participation by
other reasonable means. For this
purpose, reasonable means include, but
are not limited to, identifying services
performed over a period of time and the
approximate number of hours spent
performing the services during that
period, based on appointment books,
calendars, or narrative summaries.
Tests for individuals. You materially
participated for the tax year in an activity
if you satisfy at least one of the following
1. You participated in the activity for
more than 500 hours.
2. Your participation in the activity
for the tax year was substantially all of
the participation in the activity of all
individuals (including individuals who
didn’t own any interest in the activity) for
3. You participated in the activity for
more than 100 hours during the tax
year, and you participated at least as
much as any other individual (including
individuals who didn’t own any interest
in the activity) for the year.
4. The activity is a significant
participation activity for the tax year, and
you participated in all significant
participation activities during the year for
more than 500 hours.
A significant participation activity is
any trade or business activity in which
you participated for more than 100
hours during the year and in which you
didn’t materially participate under any of
the material participation tests (other
than this fourth test).
5. You materially participated in the
activity (other than by meeting this fifth
test) for any 5 (whether or not
consecutive) of the 10 immediately
preceding tax years.
6. The activity is a personal service
activity in which you materially
participated for any 3 (whether or not
consecutive) preceding tax years.
An activity is a personal service
activity if it involves the performance of
personal services in the fields of health,
law, engineering, architecture,
accounting, actuarial science,
performing arts, consulting, or in any
other trade or business in which capital
isn’t a material income-producing factor.
7. Based on all the facts and
circumstances, you participated in the
activity on a regular, continuous, and
substantial basis during the tax year.
You didn’t materially participate in the
activity under this seventh test,
however, if you participated in the
activity for 100 hours or less during the
Your participation in managing the
activity doesn’t count in determining
whether you materially participated
under this test if:
a. Any person (except you) received
compensation for performing services in
the management of the activity, or
b. Any individual spent more hours
during the tax year performing services
in the management of the activity than
you did (regardless of whether the
individual was compensated for the